Ariana Drehsler/Bloomberg
The Securities and Alternate Fee introduced settlements Monday with the previous CEO and chief threat officer of the now-defunct Silvergate Capital Corp., whereas additionally submitting civil fees in opposition to the crypto-friendly financial institution’s onetime chief monetary officer.
Former CEO Alan J. Lane and former Chief Threat Officer Kathleen Fraher settled allegations that they misled buyers in regards to the energy of the financial institution’s anti-money laundering compliance program and its monitoring of crypto prospects. These prospects included FTX, the crypto change whose spectacular collapse led to Silvergate’s personal demise 5 months later.
The SEC accused Antonio Martino, Silvergate’s onetime CFO, of deceptive buyers about losses incurred by the La Jolla, California-based financial institution following the November 2022 collapse of FTX. Martino denied the allegations and vowed to defend himself in court docket.
The SEC’s actions on Monday had been a part of a coordinated collection of strikes by federal and state regulators. On the similar time, the Federal Reserve Board and the California Division of Monetary Safety and Innovation introduced $63 million in penalties in opposition to Silvergate for deficiencies in inner monitoring.
The SEC mentioned that Silvergate didn’t conduct acceptable monitoring in 2021 and 2022 of its essential product, referred to as the Silvergate Alternate Community, the important thing mechanism for the financial institution’s crypto asset prospects to switch funds amongst themselves. The financial institution’s system failed to watch roughly $1 trillion in suspicious banking transactions associated to its crypto foreign money change, in keeping with the SEC.
“The Financial institution additionally didn’t detect practically $9 billion in suspicious transfers by FTX and its associated entities,” the SEC mentioned in a criticism filed Monday within the U.S. District Courtroom for the Southern District of New York.
Lane and Fraher misrepresented the operational and authorized dangers dealing with Silvergate Financial institution by falsely stating in SEC filings and different public statements that the financial institution had an efficient Financial institution Secrecy Act/anti-money laundering compliance program tailor-made to the heightened dangers posed by its crypto asset prospects, the SEC mentioned.
Lane and Fraher settled with the SEC with out admitting to or denying the company’s allegations. Lane agreed to pay a $1 million civil penalty, whereas Fraher agreed to pay a $250,000 civil penalty, in keeping with the SEC. Each former Silvergate executives additionally agreed to everlasting injunctions and five-year officer-and-director bars, SEC mentioned in a press launch.
Haima Marlier, a lawyer at Morrison and Foerster who represents Fraher, declined to remark. A lawyer for Lane didn’t instantly return a name in search of remark.
After the failure of FTX prompted panic within the crypto trade — resulting in a run on Silvergate and a extreme liquidity disaster — the SEC mentioned that Martino engaged in a fraudulent scheme to mislead buyers and regulators in regards to the financial institution’s monetary situation.
In want of money, the financial institution had offered a big chunk of its bond portfolio within the fourth quarter of 2022. However the worth of its bond investments sunk when rates of interest rose, so Silvergate was compelled to take a success on the sale.
The lawsuit alleges that Martino and different financial institution leaders knew it must dump extra of its bonds at a loss — thus eroding its capital cushion additional. By understating the quantity of bonds it wanted to eliminate, the financial institution was in a position to masks the monetary hit it will quickly be compelled to take, prosecutors mentioned.
Martino “knew or recklessly disregarded that the financial institution was extra probably than to not be required to promote way more” in securities than it had advised buyers, prosecutors mentioned. Quite than $200 million in extra securities gross sales that the Martino had “falsely implied” had been wanted, the financial institution ended up promoting some $1 billion, the lawsuit mentioned.
Adam Lurie, a lawyer representing Martino, mentioned that his shopper denies the allegations.
“Mr. Martino acted fairly and in good religion all through his time at Silvergate,” mentioned Lurie, a accomplice on the regulation agency Linklaters. “He denies any wrongdoing and intends to problem the SEC’s claims in court docket. The SEC is inappropriately in search of, with the good thing about hindsight, to substitute its enterprise judgment with selections that Mr. Martino — a profession finance skilled — made in actual time.”
Silverage introduced on March 8, 2023, that it will liquidate and stop operations. The financial institution confronted a possible enforcement motion by financial institution regulators, excessive prices to remediate its BSA/AML program and an auditor’s demand that the financial institution appropriate its monetary statements regarding losses from anticipated securities gross sales, the SEC mentioned.
The Fed and California’s DFPI issued a joint stop and desist order in opposition to the financial institution on Could 23, 2023 to facilitate the financial institution’s voluntary liquidation.
Polo Rocha and Kevin Wack contributed to this report.
